Deutsche Bank AG (DBK)’s Japanese brokerage unit will probably be penalized by local regulators for breaching rules over excessive spending to entertain clients, two people with knowledge of the matter said.
The Securities and Exchange Surveillance Commission, Japan’s securities watchdog, is poised to recommend as early as today that the nation’s Financial Services Agency take administrative action against Deutsche Securities Inc., one of the people said, asking not to be identified because the matter is confidential. The FSA may order the brokerage to improve compliance and internal controls, the people said.
The potential punishment would add to the German bank’s regulatory woes after it set aside a further 1.2 billion euros ($1.6 billion) to cover legal costs amid global probes into interbank rate rigging and lawsuits relating to the U.S. housing market. Japan’s regulator has been beefing up oversight of the pension industry since it found that AIJ Investment Advisors Co. covered up losses of clients’ money last year.
“The FSA has been strengthening its scrutiny over pension funds to protect investors, which is positive,” said Nobuyuki Fujimoto, senior market analyst at SBI Securities Co. in Tokyo. “It’s difficult to define what excessive means as most salesmen go out for dinner with clients.”
The SESC conducted a regular inspection of Goldman Sachs Group Inc. (GS:US)’s Japanese brokerage unit that included a review of its client entertainment practices, said three people with knowledge of the matter. The commission decided not to take any disciplinary action against the New York-based firm, according to the people. Hiroko Matsumoto, a Tokyo-based spokeswoman at Goldman Sachs, declined to comment.
Employees of Deutsche Securities probably spent too much entertaining managers at Japanese pension funds in order to win investments in products the brokerage sold, the people said. The firm may have spent about 6 million yen ($59,000) to 9 million yen on executives tied to three pension funds from 2010 to 2012, Nikkei newspaper reported earlier today.
Takayuki Inoue, a Tokyo-based spokesman at Deutsche Securities, declined to comment, as did Kotoku Watanabe, a spokesman for the FSA. The SESC oversees the securities industry to ensure the integrity of Japan’s capital markets and protect investors, and makes recommendations to the FSA on any disciplinary action against firms.
This would be the second time Japanese authorities penalize financial firms for excessively entertaining clients. The Kanto Local Finance Bureau ordered KTOs Capital Partners Co., a Japanese hedge fund, to halt some operations for three months in July for paying entertainment expenses for officials at a pension fund.
The FSA found last year that executives of AIJ Investment Advisors, a Tokyo-based pension fund manager, hid more than $1 billion of trading losses by fabricating reports. The case prompted the regulator to propose law changes including increased supervision of the investment management industry.
Deutsche Bank’s profit slid 94 percent to 41 million euros in the three months ended September after its legal costs swelled by 1.2 billion euros, Europe’s largest investment bank by revenue said in October.
The bank is interviewing employees as it investigates whether traders tried to rig benchmark interest rates, a person familiar with the matter said in October. Frankfurt-based Deutsche Bank has said that an internal probe indicates no wrongdoing by current or former management board members.
Europe’s biggest banks have racked up more than $77 billion in legal costs since the peak of the global financial crisis in September 2008, five times their combined profit last year, data compiled by Bloomberg showed last month.
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